Xbox TV? We've heard it all before, and this time the rumour has replaced the word Apple with the name Microsoft, but it's essentially the same: saying that it will come to market as a virtual cable operator, delivering TV channels over the internet in return for a monthly fee.

Let's just examine that for a moment. Apple, with all of its revenues, profits and cash, not to mention devices and all round media vision, found that impossible to achieve when it re-launched the Apple TV earlier this year. It was clearly “in negotiations” to do much the same and it would have been a very cool idea, but those negotiations never came to anything.

This rumor was dropped by Reuters and we're sure it is true, but when was the last time Microsoft did an end run around Apple? About 1995 by our reckoning.

It's in the consumer's interest to get TV for what it's worth and not pay for the support of a physical network, like that of a cable operator network or telco network, built into the price. It's in the interests of the TV channels to reach more people and solve the problem of how they shift to the internet and make money from new sources. It would also lead to choice, and a rapid re-pricing of advertising supported content. The internet continues to grow advertising revenues rapidly, and where better for TV to recover its weakening advertising punch?

Which is why Pay TV operators have to nip it in the bud. If you were Comcast or Time Warner Cable or Dish or DirecTV, wouldn't you say to a TV channel, “Do that deal and I stop carrying you,” and create a choice for any cable network of measuring immediate loss of revenue from both carriage payments and advertising reach, against a long term potential gain, which is not guaranteed.

If Microsoft is talking to the national broadcast networks in the US like NBC (no, says Comcast, its new owner) or ABC (over my dead body, says its biggest shareholder Steve Jobs) or Fox and CBS, why would Microsoft get a different answer from them than Google, Amazon or Apple?

And could they survive legal and FCC scrutiny if they gave different answers to different companies offering different devices? Already the accepted route to get national broadcast networks is to simply include them in the way ivi and FilmOn has done and claim that since they are really a cable TV company, just using the internet for delivery, they have every right to pay paltry statutory licensing fees to the Register of Copyrights.

Reuters says the idea is for Microsoft to use the Xbox to deliver both national networks like ABC, NBC, Fox and CBS, as well as paid for channels like ESPN, HBO or CNN. We understand that it already offers parts of ESPN content on the Xbox network.

The natural extension to this is to somehow harness interactivity to the advertising or even to some of the programs. The typical nonsense was traipsed out about messaging with friends while you watch etc... which of course everyone does now using a separate device, you don't need an Xbox for that.

The Reuters story talked about the service being a year away, which is code for 'no one has quite agreed any terms yet but we are still talking'.

It is obvious that the entire content neighborhood in the US is running scared of Pay TV operators and their contractual power. We know that evidence has been collected about Comcast contracts and how they prevent other start-ups getting their hands on cable networks. The failure of Apple to break this content cartel in its latest Apple TV launch suggests that it cannot be done, at least not yet.

What Apple managed to achieve instead of a set of entire TV channels, was a drop in the price of each program from $2 to $1, which makes for one of the most expensive TV services on the planet if you cut the cord and use iTunes for all your TV. In the process this was offered to everyone else, and presumably Microsoft could get in on that deal alongside Amazon and Sony's Qriocity.

What we think we are seeing is that the new management at the Microsoft Entertainment and Devices division in the form of Don Mattrick (Microsoft lost leader Robbie Bach in May), is taking a fresh look at what's possible in the TV world and we would expect a new approach at Xbox with respect to content at some point. But taking on cable and DTH as well as its Mediaroom customers, is unlikely to constitute that direction and it is just one of many scenarios that Microsoft might try to turn the ailing Xbox business around.

Microsoft casts the Xbox as a success, for instance in its first quarter it said that Xbox 360 consoles grew 38 per cent, outselling every competing console in the US with revenues up $409m; but some $350m of that was sales of the new game Halo Reach (although next quarter Microsoft will be able to report huge sales of Kinect as well), and Microsoft has given up breaking out this revenue or saying if it is profitable or not.

So although it made an operating profit of $382m last quarter for the entertainment division, its most successful quarter ever, we suspect this represented a net loss under GAAP and anyway that level of business is unsustainable. For the last year Xbox revenue decreased five per cent, and Xbox console shipments began their slide down their normal life-span into yet another expensive R&D program for the next device.

Sure the Xbox is a powerful device which is plugged into countless TV sets, with tens of millions of Xbox Live! customers, and it should be trying to get into the TV business. But this is a fraction of the number of Apple devices out there, and we can't see why broadcasters would be falling over themselves to launch a new direction with Microsoft - unless, of course, it included facilities placed into the PC operating system.

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